Technical Explanation PDF

TECH!\lCAL EXPLANATIĈ OF THE CO:--VENTI°' BETWEEN THE

GO\
'
ERNMEI\T OF THE UNITED STATES OF AMERICA A."-D

THE GOVERNMENT C,;· THE REPUBLIC OF
THE PHILIPPINES FOR

THE AVOIDANCE OF DOUBLE TAXATlOĉ AND THE PREVENTION

OF FISCAL EVASIO
N WITH RESPECT TO TAXES ON INCOME

SIGNED AT MANILA ON OCTOBER 1, 1976
Article 1, TAXES COVERED
Paragraph (1) designates the taxes of the Contracting
States which are subject to the Convention with respect to
the United States, the subject taxes are the Federal income
taxes imposed by the Internal Revenue Code ("Code"), but
not including sections 53Ċ (accU111ulated earnings tax) and
541 (personal holding company tax). The Convention only
applies to taxes on income contained in the Internal
Revenue Code. Thus, the Convention does not, for example,
apply to the excise tax under C
ode section
1491. Also the
Convention does not apply to U.S. social security taxes and
the Federal unemployment tax.
In the case of the Philippines, paragraph (1) provides that the Con•

vention
applies to the income tax imposed by Title II of th
e National

Internal Revenue Code ("Philippine Code"), but not including taxes im•

posed under sections 25 (additional tax on improperly accumulated

earnings) and 63 (personal holding company tax),

Pursuant to paragraph (2), the Convention '\\111 also apply to taxes
substantially similar to those covered by paragraph
(1) which are imposed
ln addition to, or in place of, existing Income taxes, after October 1, 1976,
(the date of signature of the Convention).
Paragraph (3) provides that the competent authority of each Contract•

ing State will notify the competent authority of the other Contracting State

of any amendment of the tax laws referred to in paragraph
(1) or (2), and

of the adoption of substantially similar taxes imposed ln addition to, or

in
place of, the taxes referred to in paragraph
(1), by transmitting the

texts
of such amendments or statutes at least once a year. Paragraph

(4) provides for a similar &Mual exchange with respect to the publication

of
material concerning the application of the Convention, '\\
'
hether in the

form of reeulations, rulings or judicial decisions.

Article 2, GENERAL DEFINITIONS
Paragraph
(l) sets out definitions or" certain basic terms used In the

Convention, Unless the context otherwise requires, the terms defined

in this paraeraph have a uniform meaning throughout the Convention.

It should be noted that a nwnber
of important terms
are defined else­

where in the Convention.

The term "United States" means the United States of America. When
used ln the geographical sense. the term means the states of the Unite
d
States and the District of
Colwnbia. Thus. the
Convention does not
apply
to
the possessions of the United States or the Commonwealth
or Puerto
Rico. The term "United States" also includes the
territorial sea and.
as provided in section 638 of the Code, the continental shelf or the United
States.
The term "Philippines" means the Republic of the Philippines.
When
used ln a geo
graphical sense. the term means the territory compris­
ing the Republic of the Philippines.
The term "Contracting State" is defined to mean the United States

or the Philippines as the context requires.

The term "person" includes an individual, a partnership. or cor­

poration. an estate or a trust.

The term "United States corporation" is defined as a corporation.

or any
unincorporated entity which is treated as a corporation f'or

United States tax purposes. which is created or organized ln or under

the laws of the United States, any state thereof, or the District of

Colwnbia. A "Philippine corporation" is defined as a corporation. or

any unincorporated entity which is treated as a corporation f'or Philip­

pine tax purposes. which is created or organized in the Philippines or

under its laws. Under section 840:>) of the Philippine Code. the term

"corporation" includes partnerships. no matter how created or organized,

other than general professional partnerships. A general professional

partnership is formed for the sole purpose of exercising a common

profession, no part of the income of which is derived from engaging in

a trade or business. Thus. a partnership formed in the United States

which is engaged in a trade or business in the Philippines is considered

to be a corporation f'or Philippine tax purposes. Nonetheless. f'or pur­

poses of the Treaty. that partnership will not be considered to be a

Philippine
corporation within the meaning of paragraph (l )(e)(ii) since

. it was not created or organized in or under the laws of the Philippines.
With respect to the United States, the term "competent authority"

means the Secretary of the Treasury
or his delegate.
With respect to

the Philip
r,
ines. it means the Secretary of Finance or his
delegate.
The

term
"tax ' means those taxes imposed by the United States or the

Philippines
to which the Convention applies by virtue
of Article l (Taxes

Covered).
However, as provided in
pa
ra
graph
(4) of Article 24 <Nondis­

crimination), the term "taxes" or "taxation" means. for purposes of

that article. taxes or taxation of every kind imposed at the national •

state. or local level.
The term "international traffic" is defined as any transpo
rt
by a ship
or
aircraft operated by a resident of on
e
of the Contracting States except
where such transport is confi,ned solely between places within a Contracting

State. Thus, for example, coastal shipping along the Atlantic coast of
the United States Is not international traffic. However, it a ship operated
by a resident of the Philippines transports goods from Canada to the
United States, leaving some o! the good» in San Francisco and the remainder
ln San Diego, the portion o! the voyage between San Francisco and San Diego
ls international tramc.
Paragraph (2) provides that any term used In the Convention which ls
not defined therein shall, unless the context otherwise requires, have the
meaning which it has under the laws of the Contracting State whose tax is
being determined. However, where a term has a different meaning under
the laws of the Philippines and the United States or where the meaning
under the laws of one of the Contracting States
is not readily deter­
minable, the competent authorities may for purposes of the Convention
establish a common meaning ln order to prevent double taxation or to
further any other purpose of the Convention.
Article 3,
FISCAL RESIDENCE
This Article sets forth rules for determining the residence o! indi­
viduals, corporations, and other persons for purposes o! the Convention.
Residence ls important because, in general, only a resident of one of
the Contracting States may qualify for the benefits of the Convention.
Under paragraph (1), the term. "resident of the Philippines" means
a Philippine corporation (as defined in Article 2 (General Definitions))
or any other person (except a corporation or any entity treated as a
corporation for Philippine tax purposes) resident in the Philippines for
purposes of Philippine tax. Thus, for example, a partnership formed
in the United States which engages in a trade or business in the Philippines
and is treated as a corporation under Philippine tax law ls not a resident
of the Philippines. It does not meet the condition of paragraph (l)(a)(i)
since it Is not a Philippine corporation as defined In Article 2 and it does
not meet the condition or paragraph 1 (a)(ii) since it is an entity treated
as a corporation for Philippine tax purposes. Under paragraph (1) of
Article 6 (General Rules of Ti,xatlon), such a partnership may be taxed
by
the Philippines only on income from sources therein, to the extent
the partnership is treated as a resident of the United States under para­
graph (1 )(b)(ii), Similarly "resident of the United States" means a United
States corporation (as defined In Article 2) and any other person (except
a corporation or any entity treated as a corporation for United States
tax purposes) resident In the United States for purposes of United States
tax. Thus, a resident of the United States includes a resident alien
individual who is subject to tax in the United States
on his worldwide
income and a resident citizen, but under no circumstances, a foreign
corporation.
A citizen of the United States or the Philippines Is
not
automatically
a resident of the United States or the Philippines for purpos_es of this
Convention.
An Individual's residence Is determined
on the
basis of
whether the Individual Is treated as a resident for tax purposes
by a
_

Contracting
State. An individual who is a resident of both Contracting
States
will be deemed to be a resident of the Contracting State in which
he has his permanent home, his center of Vital interests (closest personal
and economic :relations), a habitual
abode, or his citizenship, in the order
listed. If the issue ls not settled by these tests, the competent authorities
will t3ecide by mutual agreement the one Contracting State of which he
will be considered to be a resident.
The
Convention provides that a partnership, estate or trust, in the
case of the United States, and a professional partnership, estate, or trust,
in the case of the Philippines, is a resident or the applicable Contracting
State only to the extent that the income derived by such person is subject
to tax in such Contracting State as the income of a resident. For example,
under United States law, a partnership is never, and an estate or trust is
often not, taxed as such. Under the Convention, in the case of the United
States income received by a partnership, estate, or trust will not qualify
for the benefits of the Convention unless such income is subject to tax in
the
United States as the income of a resident. Thus, for United States tax
purposes, the treatment of income received by a partnership will be de­
termined by the residence and taxation of its partners with respect to that
income rather than by whether the partnership Is resident in the United
States by engaging in a trade or business here. To the extent the income
of the partners is subject to United States tax as the income of residents
of the United States, the partnership will be treated as a resident of the
United States. Similarly, the treatment of income received by a trust
or
estate will be determined by the residence and taxation of the person
subject to tax on such income, which may be the grantor, the beneficiaries
or
the trust or estate itself, as the case may be.
The fact that a charitable trust or pension fund is exempt from tax
in the countcy in which it is otherwise resident is not to be construed to
deny such exempt trust or fund resident status under this Convention,
Article 4.
SOURCE OF INCOME
This Article contains the source rules which are to be used in apply­
Ing the provisions of the Convention. For example, under Article 6
(General Rules of Taxation), one Contracting State may tax a resident
of the other Contracting State only on income from sources within the
first-mentioned Contracting State (provided such resident is not
a citizen
of the first-mentioned Contracting State).
Paragraph (l) provides that, as a general rule, dividends will be
treated as income from sources within a Contracting State if paid by a
corporation of that Contracting State or if paid by a corporation of any
State, provided that, in the latter case, at least 50 percent of such cor­
poration'
s
gross income from all sources for the 3-year period (or such
part of that period as the corporation has been ln existence) ending with
the
close of its taxable year preceding the
declaration o! the
dividends
was business profits attributable to a permanent establishment which
such corporation had in that Contracting State, In such a case, only a

pro rata portion or the dividend will be treated as income from sou, ces
within the applicable Contracting State. Such portion is the amount which
bears the same ntio to the dividends as the amount or the business
profits attributable to the permanent establishment bears
to the corpora­
tion's. gross income, If a dividend would be treated under paragraph
(1)
as income from sources within both Contracting States, the pro rata
portion of the dividend which is deemed to be from sources within the
Contracting State in which the permanent establishme
nt
Is situated is
considered to be from sources only within that Contracting State. The
remaining portion of the dividend, if any, shall
be
considered to be from
sources within the other State.
A
counterpart to the dividend source rule of the Convention appears
in Code section 86l(a)(2)(B). However, under Code section 864(c)(4), only
four types of income f'rom sources outside the United States -- certain
rents, royalties, or gains on sales or intangible property: certain dividends
or interest, or gains or losses from sales of securities in connection with
certain banking, financing and security trading businesses: certain sales
of goods or merchandise through an office in the United States; and,
certain income received by foreign life insurance companies -- can be
considered to be effectively connected with the conduct of a trade or
business within the United States, I!, for example, the business profits
of
a permanent establishment maintained by a Philippine corporation is
comprised entirely of income from sources outside
the United States not
specified in Code section 864(c)(4), the United States wlll not tax
a
dividend paid by the Philippine corporation even if more than 50 percent
of
that corporation's gross income is attributable to the permanent estab·
lishment. The United States foregoes its right to tax in such circum­
stances. Under paragraph (2) of Artic:le 6 (General Rules of TPxation),
the Convention will not increase a person's United States tax.
Under paragraph (2) of Article 4, interest will be treated as income
from sources within a Contracting State only if paid by the Contracting
State, a political subdivision or local authority thereof',
or by a resident
of'
that Contracting State. The one exception to this rule is that If' interest
is paid on an indebtedness incurred in connection with a
permanent
establishment
which be
ars such interest, then such interest shall be
deemed to be from sources within the State (whether or not a Contracting
State) ln which the permanent establ_lshment is situated. This exception
permits a Contracting State, under the proper circumstances, to impose
a tax on interest borne by a permanent establishment therein, including
a
permanent establishment of a resident of a State other than a Contract­
ing State. For example, it a resident of France has a permanent es tab•
lishment ln the Philippines whic:h borrows money f'rom a resident of' the
United States and bears the interest, the interest will be deemed to be
from sources within the
Philippines. However, the United
States will not,
because
of Article 6 (General Rules of Taxation) and Code
section
861
(a)(l)(C) and (D), impcse a tax on interest received by
nonresident
alien individuals or foreign corporations from a foreign corporation
having a permanent establishment in the United States unless 50 percent

or more
of the gross
lncome
of such
corp
cration
from all
sources
for
th
e 3-year
period
ending
with the close
of its taxable
year
preceding the
the payment
of the
interest
(or such part of such period
as
the corpora•
tion
has been ln existence)
was
effectively
coMected
with the conduct
of a trade or business within the
United States. Even where
the United
States imposes
a
tax. no tax will be imposed on the portion of such
interest which bears the same ratio to the total amount of
the interest
as
the gross income of the corporation which was not effectively coMected
with
the conduct of a trade or business in the United States bears to that
corporation's gross income from all sources.
In addition. the permanent establishment exception to the general
source rule for interest will exempt interest from tax in the Contracting
State in which the payor resides if the payor has a permanent establish­
ment in a State other than a Contracting State in coMection with which
the
indebtedness of which the interest
is
paid was incurred. such interest
is
borne by the permanent establishment and such interest is paid to a
resident of the other Contracting State. This results. once again. from
the restriction in paragraph (l) of Article 6 (General Rules of Taxation)
that a resident of one Contracting State, not a citizen of the other Con•
tracting
State. may be taxed by the other Contracting State only on income
from sources within that other Contracting State. For example. lf a resi­
dent of the United States has a permanent establishment in France which
b
orrows money from a resident of the Philippines and bears the interest.
the interest will be deemed to be from French sources. even if paid by
the United States resident. Thus. the United States may not tax such
income unless the recipient-resident of the Philippines is a citizen of the
United States or has a permanent establishment in the U.S. to which the
income is attributable. The rules of Article 5 (Permanent Establishment)
will
be applied to determine whether the resident of the United States
has a permanent establishment in France.
Paragraph (3) provides that royalties for the use of. or the right
to
use. property or rights will be treated as income from sources within
a Contracting State only to the extent that such royal
ties are for the use
of. or the
right to use. such propert
y
or rights within that Contracting
State. However. if a royalty is paid with respect to a liability to pay
the royalty that was incurred in coMection with a permanent establishment
which bears that royalty. then such royalty shall be
deemed to be from
sources within the State (
whether or not a Contractin
g
State) in which the
permanent
establishment is situated. It is intended
that such exception
will be applied in a maMer similar to the exception wi
th respect to
interest. However. the
United States will not. because of Code
sections
861(a)(4) and 862{a)(4). impcse a tax on royalties received by nonresident
aliens or foreign corporations
from
a
foreign
corporation having a per•
manent establishment in the
United States excep
t
to
the extent that the
royalties are for the use of.
or the privilege of using,
the property in
the
United States or the recipient of the royalties
is engaged
in the
active conduct of a business
in the United States
so that Code section
864(c)(4 )(B)(i) applies.

Paragraph (4) provides that income (including royalties) to
which
Article 7 (Income from Real Property) applies will be treated
as
income
from
sources within a Contracting State ohly if the real property is
situated in that Contracting State,
. Under paragraph (5), income received by an individual for his per­
formance of labor or personal services, whether as an employee or in
an independent capacity, will be treated as income from sources within
a Contracting State ohly to the extent that such services are performed
in that Contracting State, However, income from personal services
performed aboard ships or aircraft operated by a resident of
a Contract­
ing
State in international traffic will be treated as income from sources
within th.at Contracting State if rendered by a member of the regular
complement of that ship or aircraft, Notwithstanding the general rule
and the above described exception, remuneration described
in
Article
20
(Governmental Functions) and payments described in Article 19 (Social
Security Payments) paid from the public funds of a Contracting State or
a political subdivision or local authority thereof will be treated as income
from sources within that Contracting State only,
Paragraph (6) contains a general qualification to the preceding source
rules, It provides that business profits attributable to a permanent estab­
l
ishment which the recipient, a resident of one Contracting State, has
in the other Contracting State will be treated as income from sources
within
that other Contracting State, Business profits attributable to such
permanent establishment may include any item of income described
in paragraphs (l) through (4) i! the item of income· is effectively connected
with the permanent establishment. See the discussion of paragraph (6)
of Article 8 (Business Profits) for a discussion of the "effectively con­
nected" concept.
Under paragraph (7), gross revenue
s from the operation of
ships or
aircraft in international traffic will be treated as from sources
within a
Contracting State to the extent the revenues are derived from outgoing
traffic originating in that State. Thus, !or example, gross revenues
derived from transporting passengers and freight from Manila to Hawaii,
non-stop aboard an airplane, are deemed to be derived from sources
within the Philippines for purposes of the Convention,
Under paragraph (8), the source of any item of income not described
in the preceding paragraphs of Article 4 will be determined by
each Con­
tracting State in accordance with its own law, However, if the source of
any
such item
of income under the laws of one Contracting State is
different from its source under the laws of the other Contracting State
or if its source is not readily determinable under the laws of one of the
Contracting States, the competent authorities of the Contracting States
may, in order to prevent double taxation
or
further any other purpose of
the Convention, establish a
common source of the item of income
for
purposes of the Convention,

As mentioned previously, several ot the source rules set out in this
Article differ to some degree from those provided in the Code. Since
paragraph (2) of Article 6 (General Rules of Taxation) provides that
the
Convention will not increase a person's United States tax, a taxpayer
is entitled to use the more beneficial or the Code rules or
the Convention
rules in calculating his United States tax.
Article 5.
PERMA?\'ENT ESTABLISHMENT
This
Article defines the term "permanent establishment. " The •
existence of a permanent establishment is relevant under Article 8 (Busi•
ness
Profits) to the taxation of business profits and in determining the
applicability of other provisions of the Convention.
Under paragraph (1 ), the ·:.,rm "permanent establishment" means a
fixed place of busjness t),rough'«-'hich•a resident of one of the Contracting
States engages in a trade or business. lllustrations in paragraph (2) of
a permanent establishment include a seat of management; a branch; an
office; a store or other sales outlet: a factory: a workshop: a warehouse:
a mine, quarry or other place of extraction ot natural resources: a build·
ing site or construction or assembly project or supervisory activities
in connection therewith, provided the site, project, or activity continues
!or a period of more than 183 days; and, the furnishing
of services,
including consultancy services, by a resident
of one Contracting State
through employees or other personnel, provided activities of that nature
continue (for the same or a connected project) within the other Contract•
ing State for a period or periods aggregating more than 183 days. Under
the building site or construction or assembly project or supervisory
activities rule, the 183-day period begins only when work physically
commences in the other Contracting State. For purposes of that rule, a
series of contracts or projects which are interdependent both commercially
and
geographically is to be treated as a single project when applying the
183-day test. In that respect, it is similar to the furnishing services
rule.
As a general rule, any
fixed facility or premises through which a
resident engages in a trade or business !or an indefinite or substantial
period
of time will be treated as a permanent establishment unless it is
used only for one or more of the activities described in paragraph (3).
Paragraph (3) specifically 9rovides that a permanent establishment does
not include a fixed place of business if it is used only
tor one or more of
the following:
(a) The use
of facilities solely for the purpose of
storage,
display, or
occasional delivery of. goods
or merchan­
dise belonging to the resident;
(b)
The maintenance of a stock of goods or merchan­
dise belonging to the resident solely for the purpose of
storage,
display, or occasional dt.,ivery:

(c) The maintenance of a stock of goods or merchan­
dise belonging to the resident solely for the purpose of processing
by another person;
(d)
The maintenance of a fixed place of business for
• the purpose of purchasing goods or merchandise,
or for collect­
ing information, for the resident;
(el The maintenance of a fixed place of business solely
for
the purpose of advertising, for the supply of information, for
scientific research, or for similar activities which have a pre­
paratory
or auxiliary character, for the
resident; or
(f) The furnishing of ser· ²es, including the provision
of equipment, in one of the Contrac
.; States by a resident of the
other Contracting State, including consultancy firms, in accordance
with, or in the implementation of, an agreement between the Con­
tracting States regarding technical cooperation. Such an agreement
was signed at Manila on April 27, 1951.
See Economic and Techni­
cal Cooperation Agreement 'l\ith the Philippines, April 27, 1951,
(1952) 3 U.S. T. 3707, T,I,A,S. 2498.
As noted, these exceptions are cumulative and a fixed place of business

used only for one or more of these purposes will not be considered a

permanent establishment under the Convention. It is intended that a

building site or construction or assembly project or supervisory acti­

vities in connection therewith which does not exist for more than 183

days
does not constitute a permanent establishment.

Under paragraph (4), a person acting in one Contracting State on
behalf of a resident of the other Contracting State, other than an agent
of an independent status to whom paragraph (5) applies, will be deemed
to constitute a permanent establishment if such person has, and habituall
y
exercises in that first-mentioned Contracting State, an authority to con­
clude contracts in the name of the resident, unless the exercise of the
authority is limited to the purchase of goods or merchandise for the
resident. Even if the person has no authority to conclude contracts in
the name of the resident, he will be deemed to constitute a permanent
establishment if he habitually maimains in .the first-mentioned Contracting
State a stock of goods or merchandise from which he regularly delivers
goods and merchandise on behalf of the resident. Similar rules appear
• in Code section 864(c)(5)(A).
01 the other hand, paragraph (5) provides that a resident of' one Con­
tracting
State will not be deemed to have
a
permanent establishment in
the other Contracting State
merely because
such resident carries on
business in such other
Contracting State
through a broker, general
commission agent, or any other agent of an independent status, where
such
broker or agent is
acting in the ordinary course of his business.

However,
if the activities of the agent are devoted wholly or almost
wholly
on behalf of that resident and the transactions between the agent
and
the resident are not made under arm's length conditions, the agent
will not be considered to be an agent o! independent status within
the
meaning
of paragraph (5), Thus, for example, an agent will not lose
his f!.tatus as an independent agent merely because he acts exclusively
or
almost exclusively for a resident of the other Contracting State, Nor
will an agent lose his status as an independent agent merely because he
enters into transactions with the resident under non-arm's length
condi·
tions. However, where both such conditions exist, the agent, in effe.ct,
is no longer independent and paragraph (5) reflects that fact. Similar
rules apply under Code section 864 (c)(5)(A)(ii), Regulations section
1. 864-7(d)(
3
)(iii) indicates that an otherwise independent agent who acts
exclusively or almost exclusively for one foreign principal may not be
considered to be an agent of independent status in appropriate circum·
stances,
Paragraph (6) provides that, except with respect to reinsurance, a
resident of a Contracting State will be deemed to have a permanent estab·
lishment in the other Contracting State if it collects premiums in that
other Contracting State, or insures risks situated therein, through an
employee or representative situated therein who is not an agent
of
independent status to whom paragraph (5) applies, A similar provision
appears in the existing United States Convention _with France,
Paragraph
(7) provides that a resident of one Contracting State shall
not be deemed to have a permanent e-stablishment in the other Contract
ing State merely because such resident sells at the termination of a trade
fair or convention in the other Contracting State goods or merchandise
which were displayed by such resident at that trade fair or convention,
The
trade fair exception is not intended to apply with respect to other goods
in the resident's inventory. This exception appears in recent United States
conventions.
•
Under paragraph (8), the fact that a corporation of one of the Contract·
ing
States controls or is controlled by or is under common control with a
corporation of the other Contracting State or a corporation which carries
on business in that other Contracting State (whether through
a
permanent
establishment
or otherwise) will not be taken into account
in determining
whether
the activities or fixed pla.ce of business of
either corporation con•
stitutes a permanent establishment of the ·other cor,poration.
Paragraph (9) provides that the principles set forth in this Article
are to be applied in determining whether there is a permanent establish­
ment
in a State other than one of
the Contracting States
or whether
a
person other than a resident of one of the Contracting States has a
permanent
establishment in one of the Contracting States. This is
necessary for the proper application
of
paragraphs (2)
and (3) of
Article
4 (Source of Income). This
paragraph is not intended
to extend
the
benefits of the Convention to persons other than residents
of the
two
Contracting States.

Article 6.
GENERAL RULES OF TcAXATION
Under paragraph (1), a resident
of one Contracting State may be taxed
by the other Contracting State on any income from souces within that other
Contracting State and only on such income, subject to the limitations set
forth in the Convention. For this purpose, the source rules contained in
Article 4 (Source or Income) are to be applied. However, if the resident
ls a citizen
of the other Contracting State, that Contracting State may tax
the
resident without regard to this paragraph because or the saving clause
of
paragraph (3).
Paragraph (2) contains
the customary rule that the Convention will
not restrict in any manner any exclusion, exemption, deduction, credit,
or
other allowance now or hereafter accorded by the laws of a Contracting
State in the determination of tax Imposed by it, or by any othe; agreement
between the Contracting States.
T
his rule renects the principle that
a
convention should not increase the tax burden on residents of the Contract­
ing States.
Paragraph (3) contains the traditional saving clause under which the
United States reserves the right to tax its citizens and residents as i! the
Convention had not come lnto effect. However, because of paragraph (4),
the saving clause does not apply In several cases ln which its applica­
tion would contravene policies reflected in the Convention which are
specifically designed to extend treaty benefits to citizens or residents.
Thus, the saving clause does not affect the provisions with. respect to
social security payments, relief from double taxation, nondiscrimina­
tion, or the mutual agreement procedure. Moreover, the saving clause
does not affect the benefits of the Convention which are conferred upon
individuals performing governmental functions, teachers, students,
trainees,
and diplomatic or consular officers who are neither citizens
of, nor have immigrant status in, the Contractin
Î
State conferring
such benefits, In
the case of the United States, 'immigrant status"
means the individual has been admitted to the United States for perma­
nent residence. The saving clause is reciprocal,
Paragraph (5) authorizes the competent authorities of
the
Contract­
ing States to prescribe regulations necessary to carry out
the p
rovisions
of the Convention. Cn the United States slde, this authority
is also
provided by Code section 7805.
Article 7.
INCOME FROM REAL PROPERTY
Under
paragraph (1 ), income from real property, including royalties
and
other payments in respect of the exploitation of natural resources
(e.g.
,
.oil
wells), and gains from the alienation (sale, exchange
or other disposi­
tion)of such property or of the right giving rise to such
royalties
or other
payments
may be taxed by the Contracting State in which the real property

or natu, ,,1 resources are situated, For purposes of the Convention.
interest on 'L1Jebtedness secured l:!Y real property (e.g., mortgages)
or secured by a right giving rise to royalties or other payments in respect
of the exploitation of natural resources are not considered as income
trom real property,
, Under paragraph (2). paragraph
(1) applies to income derived from
the usufruct. direct use. letting. or use in any other form of real property.
Article 8.
BUSINESS PROFITS
Paragraph
(1) sets forth the general rule that business profits of a
resident of one Contracting State are exempt from tax by the ·other Con­
tracting State unless the resident has a permanent establishment in the
other Contracting State, Where there is a permanent establishment.
only the business profits attributable to the permanent establishment
can
be taxed by that other Contracting State. unless the resident is a
citizen of that other Contracting State, (See the saving clause in para
graph (3) of Article 6 (General Rules of Taxation),) Under paragraph
(6) of Article 4 (Source of Income). business profits whether from sources
within or without a Contracting State attributable to a permanent establish­
ment which a resident of one Contracting State has in the other Contracting
State will be considered to be from sources within that other Contracting
State. Thus. items of income described in section 864(c)(4)(B)
•
o! the
Code attributable to a permanent establishment situated in the United
States will be subject to tax by the United States,
In determining the proper attribution of business profits under the
Convention, paragraph (2) provides that both Contracting States will
attribute to the permanent establishment such profits as it would
reasonably be expected to derive if it were an independent entity engaged
in the same or similar activities under the same or similar conditions
and dealing wholly independently with the resident of which it is a perma­
nent establishment. Paragraph (3) embellishes on that rule by providing
that business profits derived from the sale o! goods or merchandise o!
the same or similar kind as those sold, or from other business activities
of the same or similar kind as those effected. through that permanent
establishment, may be attributed to that permanent establishment if the
sale or activities had been resorted to in order to avoid taxation.
Under paragraph (4). expenses. wherever incurred. which are
reasonably allocable to business profits attributable to the permanent
establishment, including executive and general administrative expenses,
will be allowed as deductions in determining the business profits o! the
permanent establishment, However. in determining the amount of the
deduction under paragraph (4) for expenses incurred by the head office.
the deduction may be limited to the expense incurred without including
the profit element for the head office, Moreover, no deductions will be
allowed
in respect of amounts paid or payable (other than reimbursement

of actual expenses) :.:1 f. -™ ..,ermanent ei;tablishment to any office of the
resident by way of roy.: ..

:s, fees, or other similar payments in return
for the use
of patents or other rights; commissions for specific services
performed or for management; and, except for banking institutions,
interest on money lent to the permanent establishment,
·Paragraph (5) provides that no profits shall be attributed to a perma­
nent establishment merely because
of the purchase of goods or merchan­
dise by that permanent establishment for the account of such resident of
which it is a permanent establishment. Paragraph (2) does not override
paragraph (5), Thus, where a permanent establishment purchases goods
for its head office, the business profits .attributed under paragraph (2)
to the permanent establishment with respect to its other activities will
not be increased by adding a notional fig\lre for profits from purchasing.
Under paragraph (6), the term "business profits" means income de­
rived from any trade or business whether carried on by an individual,
corporation, or any other person, or group of persons, including the
rental
of tangible personal (movable) property. The term "business
profits" also includes income from dividends, interest, and royalties,
but only if the income is effectively connected with a permanent estab­
lishment, See paragraph (4)
of Article 11 (Dividends), paragraph (5
)
of Article 12 (Interest) and paragraph (4)
of Article 13 (Royalties),
The Convention contains no criteria for determining whether income
is effectively connected with a permanent establishment. However, the
"effectively connected" concept in the Convention is substantially similar
to the "effectively connected" ·concept in se
c
tion 864(c)
of the Code. It
is intended that the !actors which apply under that Code section will
apply with respect to this Convention.­
Under paragraph (7), where business profits include items of income
which
are dealt with separately in other articles
of the Convention, the
provisions of those articles will not be affected by the provisions of this
Article, Thus, for example, taxation
of interest income will be controlled
by
Article 12 (Interest) and not by this Article, If the interest is effectively
connected
with a permanent establishment, paragraph (5)
of Article 12
provides that this Article will apply,
Article 8,
SHIPPING AND AIR TRANSPORT
Article 9 permits a Contracting .State to impose a tax on fo;? profits
derived from sources therein by a resident
of the other Contracting State
from the operation
of ships or aircraft in international traffic, In so
providing, it departs from the shipping and air transport article
which
customarily appears in income tax conventions
of the United States,

Under
paragraph (l). proH;s <'¶rived by a resident of one Con­
tracting State from sources within the other Contracting State from the
operation of ships in international traffic may be taxed by both Contract­
ing
States. However. a limitation is placed on the amount of tax which
may be imposed by the country of source. The tax imposed by the coun­
try pf source, the "other Contracting State," may be as much as, but
shall not exceed l. 5 percent of the gross revenues derived from sources
in that State (as determined under paragraph (7) of Article 4 (Source of
Income))
or the lowest rate of Philippine tax that may be imposed on
profits of the same kind derived under similar circumstances by a resl­
dent
of a third State, whichever is less. Un der that formula, for example.
a
Philippine corporation which operates ·ships between Manila and Hawaii
and which engages in no other trade or business will determine its United
States
income tax in the following manner, First, it will compute a tenta­
tive tax under Code section 882 on the taxable income which is effectively
connected with the conduct of its trad· or business within the United
States,
using the source rule which appears in Code section 863, Then,
it
will compute the limitation under paragraph (1) by multiplying its gross
revenues from United States sources, using the source rule which appears
in paragraph (7) of Article 4 (Source of Income), by 1. 5 percent, The
lower of those two figures is its United States income tax. The reciprocal
exemptions of Code sections 872(b) and 883(a) do not apply to Philippine
residents because the Philippines imposes a tax on the earnings of
foreign carriers in the amount of 2. 5 percent of their gross Philippine
billings,
Paragraph (2) states that nothing in the Convention affects the right
of a Contracting State to tax, under its domestic laws, profits derived
by a resident of the other Contracting State from sources within the first­
mentioned Contracting State from the operation of aircraft in international
traffic. Thus, although the United States and the Republic of the Philippines
have placed a limitation in the Convention on the ta:xation of income from
the operation of ships in international traffic, they have not agreed to such
a
provision with respect to income derived from the operation of aircraft
in
international traffic. Such income will be taxed in accordance with
the
tax legislation of each of the Contracting States.
The tax under paragraphs (1) and (2) may be imposed notwithstanding
any other provisions of the Convention, including Article 24 (Nondiscri­
mination), Under paragraph (2) of Article 24, a permanent establishment
which a resident of one Contracting State has in the other Contracting
Stati;
will not be subject in the other Contracting State to more burden­
some taxes than a resident of that other Contracting
State carrying on the
same activites.
It is possible that, under this Article, United States residents opera­
ting ships and aircraft
in international traffic may be
sub
ject to more
burdensome taxation in the Philippines than Philippine corporations. For
example, Philippine air carriers, other than Philippine
Air Lines, and
shipping companies enjoy recurring 10-year exemptions
from
Philippine
income tax on income
derived from international
traffic. Philippine

Air
Lines is subject to a franchise tax of 2 :oercent of gross income

in lieu of all Philippine taxes, Should the President find that, with

respect to profits from the operation of ships or aircraft in international

traffic, United States citizens or corporations are being subjected to a

higher effective rate of Philippine tax t
han are Philippine citizens,

residents, or corporations, Articles 9 and 24 do not prevent the adjust­

ment o! United States income tax under Code section 896.

Paragraph
(3) provides that paragraphs (1) and (2) apply to
p
rofits

derived from the participation in a pool, a joint business
v
enture,
or in

an international operating agency,

This Article is subject to the saving clause of paragraph (3) of

Article 6 (General Rules of Taxation). Therefore, a Contracting State

may tax income from international traffic derived by a resident of the

other Contracting State without regard to this Article if such resident

is a citizen of the first-mentioned Contracting State,

Article 10. RELATED PERSO\S
This Article confirms the authority of the United States under section
482 of the Code. Thus, where a person subject to the taxing jurisdiction
of a Contracting State (whether or not a resident thereof) and any
other
related person make arrangements or impose conditions between them­
selves which are different from those which would be made between inde­
pendent persons, under paragraph
(1), any income, deductions, credits
or allowances which would, but for thoSe arrangements or conditions,
have been ta
k
en into account in computing the income or loss of, or the
tax payable by, one o! such persons, may be taken into account in comput­
ing the amount of the income subject to tax and the taxes payable by such
person in that Contracting State,
Paragraph (2) sets forth an explicit formulation of the consequence
of a redetermination made in accordance with paragraph
(1) b
y
a Con­
tracting State to the income of one of its residents. In such event. the
other Contracting State will, if it agrees with such redetermina
t
ion and
if necessary to prevent double taxation, make a corresponding adjust­
ment to the income
of a person in
such other Contracting State related
to such resident. In the case of the United States, any refunds of
tax in respect of such an adjustment shall be made notwithstanding
the statute of limitations. In situations where the other Contracting
State disagrees with the
redetermination, the two Contracting
States ,1dll
endeavor to reach agreement in accordance with the mutua
l agreeme
nt
procedure in paragraph (2) of Article
25 (Mutual Agreement
Procedu
re.),
. For a discussion of
the m
utual agreement procedure and a
fuller
explana
­
tion of the operation
of the
statute of limitations with respect
to
adjust­
ments see the discussion under Article 25,

Paragraph
(3) provides that tor
purposes
ot
the Convention a person
is
related to another person if either person
own
s or controls directly
or indirectly the other, or if a third
'R
erson or persons own or control
directly or indirectly both, "Control includes any kind of control,
whŠther
or not legally enforceable, and however exercised or exercisable,
Article 11, DIVIDENDS
Paragraph
(1) provides that dividends derived from sources within
one Contracting State by a resident of the other Contracting State may be
taxed by both Contracting States, However, paragraph (2) limits the
rate of tax imposed by the Contracting State of source to a rate not in
excess of 25 percent of the gross amount of the dividends, If the dividend
recipient
is a corporation, the rate of tax imposed by the Contracting State
of source may not exceed 20 percent of the gross amount of the dividend
if during the part of the paying corporation's taxable year which precedes
the
date of payment
of the dividend and during the whole of its prior tax­
able year (if any), at least 10 percent of the outstanding voting stock of
the paying corporation was owned by the recipient corporation. These
rate limitations do not affect the taxation of profits of the corporation
which pays the dividends,
Paragraph (3) provides that dividends paid by a corporation of one
of the Contracting States to a person other than a citizen or resident of
the other Contracting State may be taxed by that other Contracting State
only in limited circumstances, Such other Contracting State may impose
tax
if the dividends are treated as income from sources in that State under
paragraph (l)(b)
of Article 4 (Source of Income), but only on the portion of
the dividend which is deemed to be income from sources within the other
Contracting State, Moreover, the Philippines may only tax such a dividend
if the Philippine branch profits tax described in paragraph (6) has not been
paid with respect to the earnings distributed, In addition, the other Con­
tracting State may impose tax if the recipient of the dividend has a permanent
establishment or a fixed base in the State and the holding in respect of
which the dividends are paid is effectively connected with such permanent
establishment or fixed base.
Paragraph (4) provides that the limitations
of paragraph (2) shall
not apply if the recipient of the dividends derived from sources within
a Contracting State, being a resident of the other Contracting State,
carries on business in the first-mentioned Contracting State through
a permanent establishment situated therein or performs in that other
State independent personal services from a fixed base situated therein,
and
the holding in respect of which the dividends are paid is effectively
connected with such permanent establishment or fixed
base
, In such
a case, the dividends shall be treated as business
profits subject
to
the
provisions of Article 8 (Business
Profits) or income from the per­
formance of independent personal services subject to the provisions of

Article 15 (Independent Personal Services). as the case may be. If
the recipient of the dividend is a citizen or resident of the source
Contracting State, that Contracting State may tax the recipient without
regard to this Article because of the saving clause of paragraph (3)
of Article 6 (General Rules of Taxation).
Paragraph (5) provides that the term "dividends" as used in the
Convention means income from shares, mining shares, founders' shares
or other rights, not being debt-claims, participating in profits, as well
as income from other corporate rights assimilated to income from shares
by the taxation law of the State of which the corporation making the dis­
tribution is a resident.
Paragraph (6) relates to the Philippine branch profits tax. Under
section 24(b)(2) of the Philippine Code. the Philippines imposes a tax
of 20 percent upon profits which are remitted outside the Philippines
by a Philippine branch office to its mother company. Paragraph (6)
preserves the right of the Philippines to impose such a branch profits
tax by providing that nothing in the Convention will be construed to prevent
the Philippines from imposing on the earnings of a corporation (other tha?l
a Philippine corporation) attributable to a permanent establishment in
the Philippines. a tax in addition to the tax which would be chargeable
on the earnings of a Philippine corporation. &!ch Philippine branch profits
tax will not exceed 20 percent of the amount of such earnings which have
not been subjected to such additional tax in previous taxable years. and
in accordance with Philippine law, will only be imposed when such earn­
ings are rŽmitted outside the Philippines. The term "earnings" means.
for purposes of paragraph (6 ), business profits attributable to a permanent
establishment for the year in issue and all previous years after deducting
therefrom all Philippine tax imposed thereon other than the Philippine
branch profits tax.
Article 12. INTEREST
Paragraph (1) provides that interest derived by a resident of one
Contracting State may be taxed by both Contracting States. However, the
rate of tax in the Contracting State of source is limited by paragraph (2)
to a rate not in excess of 15 percent of the gross amount of the interest
and.
if the interest is derived with respect to
public issues of bonded
indebtedness, by paragraph (3) to
a rate not in excess
of 10 percent
of the gross amount of the interest.
Paragraph
(4) provides that
interest beneficially derived by one
of
the Contracting
States.
or by an instr
umentality
of that Contractin
g
State.
will be exempt
from tax
by the other
Contracting State.
Under
this rule. interest income
derived by the Central
Bank of the Philippines,
the Federal Reserve Banks of the United States, the Export-Import Bank
of the United States. the Overseas Private Investment Corporation (OPIC).

and such other institutions of either Contracting State as the r:ompetent
authorities
may determine by mutual agreement on loans made tc .::-esi­
dents of the other Contracting State will be exempt from tax in that
other State. The exemption also applies where a resident of a Contract­
ing State receives interest income with respect to debt obligations guaran­
teed or insured by that Contracting State or an instrumentality thereof.
.
.
Paragraph
(5) provides that the reduced rate of
tax under paragraphs
(2) and (3) and the exemption under paragraph (4) will not apply if the
recipient of interest from sources within one Contracting State, being a
resident of the other Contracting State carries on business through a
permanent establishment situated therein or performs in that other State
independent personal services from a fixed base situated therein and the
debt claim in respect of whic.h the interest is paid is effectively connected
with such permanent establishment or fixed base. In such a case, the
interest will be treated as business profits subject to the provisions of
Article 8 (Business Profits) or income from the performance of independ­
ent
personal services subject to the provisions of Article 15 (Independent
Personal Services), as the case may be.
If excessive interest is paid to a related person, paragraph (6) pro
vides that this Article does not apply to the excessive portion of the pay­
ment. The excessive portion may be taxed by each Contracting State
according to its own laws, including the Convention where applicable. In
the case of the United States, the excessive portion may be taxed as a
dividend, in which case the provisions of Article 11 (Dividends) will apply.
•
Paragraph (7) defines interest for purposes of the Convention as in­
come from debt-claims of every kind, whether or not secured by mortgage,
and whether or not carr
r,i
ng a ri
¹
ht to participate in the debtor's profits.
In particular, the term 'interest ' includes income from government
securities and income from bonds or debentures, including premiums
and prizes attached to such bonds, debentures or government securities
and other income (such as original issue discount) which under the taxation
laws of the Contracting State in which the income arises is assimilated
to income from money lent.
This Article is subject to the saving clause of paragraph (3) of Article
6 (General Rules of Taxation), Therefore, interest derived by a citizen
or
resident of the source Contracting State may be taxed by that Contracting
State without regard to this Article,
Article 13, ROYALTIES
Paragraph (1) provides that royalties derived by a resident of one
Contracting State from sources within the other Contracting State may be
taxed by both Contracting States, However, the rate of tax imposed by
that
other Contracting State on such royalties is limited under paragraph
(2). If the royalties are derived from sources within the United States,

the United States tax is limited to a rate which does not exceed 15 percent
of the gross amount
of those royalties, 0, the other hand. if the royaltie•
are derived from sources within the Philippines. the tax is subject to
three limitations. In general. the Philippine tax is limited to a rate
w
hich does not exceed 25 percent of the gross amount
of the royalties.
However. if the royalties are paid by a corporation registered with the
Philij>pine Board or Investments and engaged in preferred areas or activlty.
the tax is limi
t
ed to a rate which does not
exceed 15 percent
of the gross
amount or the royalties. Notwithstanding such 25 percent and 15 percent
limitations. the Philippine tax cannot exceed the lowest rate of Philippine
tax that may be impo.sed on royalties of the same kind under similar cir­
cumstances to a resident of a third State, Thus. for example, because
the Philippines agreed to limit its tax -on film. royalties to an amount not
in
excess of l O percent of the gross amount of such royalties in its Income
Tax Conventions with Sweden and Denmark, that limitation will apply to
film
royahies paid under similar circumstances to United
States residents,
or course. if those 10-percent limitations are renegotiated upward by the
Philippines the limitation with respect to the tax on United States residents
will be affected. However. under paragraph (2) of Article 29 (Entry Into
Force). such third-described limitation with respect to the tax on royalties
will not have effect with respect to payments for the use
or.
or the
right
to use. a copyright of cinematographic films or films or tapes used for
radio or television broadcasting until January 1. 1979.
The term "royalties" is defined in paragraph (3) as payments
of any
kind made as consideration for the use of.
or the right to use. any copy­
right of literary. artistic. or scientific work. including copyrights of
cinematographic films or films or tapes used for radio or television broad­
casting. any patent. trademark. design. model. plan. secret process or
formula. or other like right or property. or information concerning indus­
trial, commercial, or scientific experience (know-how). The term "royal­
ties" also includes gains derived from
the sale. exchange. or other
disposition
of any such right or property which are contingent on the
productivity,
use. or disposition thereof. If the amounts realized are
not
so contingent, the provisions of Article 14 (Capital Gains) may apply.
p, ragraph (4) provides that the tax rate limitations of paragraph (2)
shall not apply if the recipient of the royalties. being a resident of a
Contracting State. carries on business in the other Contracting State in
which the royalties arise through a permanent establishment situated
therein. or performs in that other State professional services from a fixed
base situated therein. and the right or property in respect to which the
royalties are paid is effectively coMected with such permanent establish­
ment or fixed base, In such case. the royalties will be treated as business
profits subject to Article 8 (Business Profits) or income from the per­
formance
of independent personal
services
subject to tax under Articl
e
-
15
(Independent Personal Services).
CANADA 838

If' excessive royalties are paid to a related person, paragraph (5)
provides
that this Article does not apply to the excessive portion
of the
royalty. The excessive portion may be taxed by each Contracting State
according to its own laws, including the Convention where applicable.
Thus, in the ·case of the United States, the excessive portion may be
treated as a dividend or interest, or in whatever other manner is appro•
prtate.
This Article is subject to the saving clause
of paragraph (3) of
Article 6 (General Rules of Taxation). Therefore, royalties derived by
a citizen or resident
of the source Contracting State may be taxed by
that Contracting State without regard to this Article.
Article 14. CAPITAL GAINS
This Article sets forth the circumstances in which gains derived
by a resident of one Contracting State may be taxed by tlie other Contract­
ing State.
Under paragraph
(l ), gains from the alienation of tangible personal
(movable)
property forming part
of the business property of a permanent
establishment
which a resident of a Contracting State has in the other
Contracting State or gains from the sale of tangible personal (movable)
property pertaining to a fixed base available to a resident of a Contract•
ing State in the other Contracting State for the .purpose of performing
independent personal services, including gains from the alienation of the
permanent establishment (along or together with the whole enterprise) or
the fixed base, may be taxed in that other State. However, gains derived
by a resident of a Contracting State from the alienation of ships, aircraft
or containers operated by such resident in international traf!ic will only
be subject to tax in the State of the operator's residence, notwithstanding
the fact that profits derived by such resident from sources within the
other Contracting State from the operation of such ships or aircraft may
be
taxed by both States under Article 9 (Shipping and Air Transport).
Gains which are considered to be royalties under paragraph (3) of Article
13 (Royalties) will only be taxed in accordance with the provisions of
Article 13.
Paragraph (2) provides that gains from the alienation of any property
other than those mentioned in paragraph
(l) or those mentioned in Article
7 (Real Property) will only be taxed in the Contracting State
of which the
alienator is a resident.
1f the recipient of the gain is a resident of one Contracting State
and a citizen of the other Contracting State, that other Contracting State
may
tax the recipient without regard to
this Article because of the saving
clause of paragraph. (3)
of Article 6 (General Rules of Taxation).

Article 15.
INDEPENDENT PERS°'AL SERVICES
In dealing with the taxation of income from personal services, the
Convention distinguishes between "independent" and "dependent" personal
services, The Convention also provides special treatment with respect
to
individuals who are public entertainers.
Under paragraph (1), income derived by an individual resident of
one Contracting State from the performance of personal services in an
independent
capacity may be taxed only by that Contracting State, How­
ever, under paragraph (2), such income derived from services performed
in the other Contracting State may also be taxed in that other Contracting
State in certain circumstances. Thus, if the individual has a fixed base
regularly available to him in the other Contracting State for the purpose
o! performing his activities, r-æ may l:!e taxed by that State, but only on
the income that is attributable to that fixed base (the term fixed base is
synonymous with the term "permanent establishment" as described in
Article 5_(Permanent Establishment)), Similarly, if the individual is
present in the other Contracting State for a period or periods aggregating
90 days or more in the taxable year, he may be taxed by that State.
Finally, if the gross remuneration derived in the taxable year from
residents of the other Contracting State for the performance of per­
sonal services in an individual capacity in that other Contracting State
exceeds $10, 000 or its equivalent in Philippine pesos that other Contract­
ing State may tax the income of that individual from the performance
of those services. Since the $10, 000 is gross remuneration, it includes
any expenses, such as airfare, borne on behalf of or reimbursed to the
individual performing the personal services. Article 15 also provides
that the competent authorities may specify in an exchange of letters that
the
$10,000 limitation will be increased if circumstances v.-arrant, i, e,,
if infiation reduces the real value of $10,000, Oice increased. the
limitation can be decreased by the competent authorities, but never
to an amount less than $10,000.
Paragraph (3) makes clear that the other Contracting State referred
to in paragraph (2) may impose its tax only on net income,
Under the saving clause of paragraph (3) of Article 6 {General Rules
of Taxation), the other Contracting State may also tax any individual who
is a citizen or resident of that other Contracting State without regarc!
to this Article.
Personal services performed by an individual in an independent
capacity are services performed for his own account where he receives
the income and bears the losses arising from such services. If an
individual is an independent contractor, he Is considered to perform
personal services in an independent capacity, Income from services
in which capital is a material income-producing factor, however, will

generally be governed by the provisions of Article 7 (Business Pro!its).
Generally, the term "personal services in an independent capacity"
includes, but is not limited to, services rendered as a director or a
corporation or :rendered by physicians, lawyers, engineers, architects,
dentists, and accountants performing personal services as sole pro­
prietors or partners, Services performed by employees, such as by
an officer of a corporation, are dependent personal services to which
A,;ticle 16 (Dependent Personal Services) applies.
Article 16,
DEPENDENT PERSO'.'\AL SERVICES
This Article deals with the taxation in respect o
f dependent per­
sonal services. This Article is similar in many respects
t
o Article 15
(Dependent
Personal Services) of the CECO Model Convention. Under
paragraph (1), wages, salaries, and similar remuneration derived by
an indi\'idual who is a resident of one Cont.:-acting State from labor or
personal services performed as an emp×oyee, including income from
services performed by an officer of a corporation, may be taxed by
that Contracting State, except as provided in Article 20 (Governmental
Functions). ln addition, except as provided by paragraphs (2) and (3)
and in Articles 20 (Governmental Functions), 21 (Teachers), and 22
(Students and Trainees), remunerationfrom the performance of dependent
personal services derived from sources within the other Contracting State
may be taxed by that other Contracting State.
Under paragraph (2), dependent personal service income derived by ·
an individual resident of one Contracting State will be exempt from tax
by the other Contracting State if: (a) the individual is present in that
other
Contracting State !or a period or periods aggregating less than 90
days in the taxable year; (b) the individual is an employee of a resident
of
the first-mentioned Contracting State or of a permanent establishment
maintained in the first-mentioned Contracting State; and (c) the remunera­
tion is not borne ·as such by a permanent establishment or fixed base which
the employer has in the other Contracting State. Such income, however,
may also be taxed by that other Contracting State without regard to this
Article
if the individual is a citizen or resident of that other Contracting
State, because of the saving clause of paragraph (3) of Article 6 (General
Rules of Taxation).
In the United States, remuneration from the performance of depend­
ent services will be viewed as not having been borne by
the permanent
establishment or fixed base maintained in the United States
if the employee
is performing stewardship or overseeing functions for the benefit of a
resident or or a permanent establishment maintained in the Philippines.
However,
the remuneration will be considered to be borne by the perma­
nent establishment or fixed base maintained in the United States lf the
remuneration
is paid for activities other than stewardship or overseeing
functions and the permanent establishment or fixed base is entitled to

claim the employee's remuneration as a deduction in computing tax­

able Income for United States purposes because the remuneration ls

definitely related and allocable to its gross income or a class of its

gross income pursuant to Code section 861 and the regulations there­

under.

•
PPragraph (3) provides that, notwithstanding the provisions of para­
graphs (2) and (3), remuneration derived by an employee (even lf a resi­
dent of a State other than a Contracting State) of a resident of one
Con­
tracting State for labor or personal services performed as a member o!
the regular complement of a ship or aircraft operated in international
traffic by a resident of that Contracting State may be taxed only by that
Contracting State.
Article 17.
ARTISTES AND ATHLETES
This Article deals with the taxation of income derived by public
entertainers and athletes (sometimes referred to as "artistes and athletes")
in respect of the performance of services as such in a Contracting
State. The Article applies In cases where an artiste or athlete performs
services on his ov.'?1 behalf and in cases where services are performed
on behalf o! another person, as an employee or pursuant to any other
arrangement.
Paragraph (1) states the general rule that notwithstanding the pro­

visions of Articles 15 (Independent Personal Services) and 16 (Dependent

Personal Services), income derived by public entertainers such as

theater, motion picture, radio, or television artistes, and musicians,

and by athletes, from their personal activities as such, may be taxed

in the Contracting State where those activities are exercised. Such

income, however, is taxable under this Article only where it exceeds

$100 or Its equivalent In Philippine-pesos per day or exceeds in the

aggregate $3,000 or its equivalent in Philippine pesos during the taxable

year.
As noted above, this paragraph overrides
the provisions of Articles
15 and 16, so that an artiste or athlete may be taxed in the State where
his activities take place regardless of the period of time he is present
in that State. Generally, however, income derived from services rend­
ered by producers, directors, technicians and others who are not aMistes
and athletes is taxable in accordance with the provisions of Article 15
or
16, as the. case may be,
Paragraph (2) deals with cases where income In respect of the

activities of.an entertainer or athlete accrues to
a person other than,
or

in addition to, the entertainer or athlete. It is based on paragraph (2)

• ·of Article 17 (Artistes and Athletes) of
the OECD Model Convention and
a
counterpart Is found in recent United States conventions with the United

Kingdom, Japan, Trinidad and Tobago, and Iceland. A common method
·employed by foreign entertainers is to perform services in the United
States as an employee of or a contractor for a corporation or other
person. That person may act as the nominal recipient of the income
in respect of the entertainer's services and the entertainer may act
as its "employee" or "contractor." In such cases, the corporation
may escape taxation in respect of those services by reason of Article
8 (Business Profits) because it does not have a permanent establishment
in the United States described under Article S (Permanent Establishment).
The entertainer may also escape taxation by receiving a small salary
·while in the United States and by receiving payment in a later year when
the income is subject to reduced rates or tax or no tax at all, or by
liquidating the corporation after the services are performed.
Paragraph
(2) is designed to deal with these situations by providing

that where income in respect of the personal activities of an artiste or

athlete accrues to the benefit of another person (including a co ̄·poration,

trust, or partnership of either Contracting State or any third State), that

income may, notwithstanding the provisions of Articles 8 (Business

Profits), 15 (Independent Personal Services), and 16 (Dependent Personal

Services), be taxed in the Contracting State in which the activities of the

entertainer or athlete are exercised, Thus, for example, such other

person could not claim the permanent establishment protection provided

by Articles 5 (Permanent Establishment) and 8 (Business Profits).

For purposes of paragraph (2), income is considered to accrue to
the-benefit of another person where that other person has control over
or the right to gross income derived in respect of an entertainer's or
athlete's services as such. This rule applies regardless of whether the
other person is a "sham" corporation or conduit. However, income will
not be deemed to accrue to the benefit of another person where it is
established to the satisfaction of the competent authority of the Contract•
ing State where the services are performed that neither the entertainer
or athlete, nor persons related thereto, participate directly or indirectly
in the profits of such other person or receive any benefit from such
profits. Persons may be considered to be related to the artiste or athlete
regardless of whether the persons are considered to be related under the
provisions of paragraph (3) of Article 10 (Related P.ersons). For this
purpose, a person may be considered to be related to the artiste or athlete
if he is an employee or agent of the artiste or athlete, or if
he is regularly
employed by the artiste or athlete in an advisory capacity, such as his
attorney, accountant, or investment advisor. An artiste or athlete will
be considered to participate in the profits of the other person if he received,
or is entitled to receive, deferred compensation, bonuses, fees, dividend!l,
partnership or other distributions
from that person or the proceeds
from
the
sale or disposition of an interest in that person during the year in which
services
are performed, or in any subsequent year.

Par
.. :- . ·,1 (3) provides that, notwithstanding the provisions or para­
graph
(1) ar,a Articles 15 (Independent Personal Services) and 16 (
De­
pendent Personal Services), income derived from activities performed
in a Contracting State by public entertainers
or athletes will be exempt from
tax in that Contracting State if the visit to that State is substantially sup­
po.rted or sponsored by the other Contracting State and the public entertainer
or a
thlete is certified as qualified under this provision by the competent
authority or the sending State. Under this provision, for example, Philip•
pine folk dance troupe performers would be exempt from tax in the United
States
i! their visit is substantially supported or sponsored by the Philip•
pine
Government and the Secretary or Finance of the Philippines or his
delegate certifies those performers· as qualified for exemption.
Article 18.
PRIVATE PENSIONS AND ANNUITIES
Except as.provided in Article 20 (Governmental Functions). pensions
and other similar remuneration paid to an individual will be taxable under
paragraph
(1) only in the Contracting State where the service is rendered.
Thus. private pensions and similar remuneration derived from sources
within one Contracting State by an individual resident or the other Contract­
ing State may be taxed in the first-mentioned Contracting State. The term
"pensions and other similar remuneration" is defined in paragraph (4) to
include any periodic payments, other than payments covered in Article
19 (Social Security Payments). made by reason or retirement or death
and in consideration for services rendered, or by way of compensation
for injuries or sickness received in connection with past employment.
Thus,
where payments are considered to be pensions or similar remunera­
tion
under the laws of one of the Contracting States, such payments will be
considered to be pensions or similar remuneration for purposes of para­
graph (1), subject to an agreement
to the
contrary by the competent
authorities
acting under paragraph (2) o
f' Article 2 (General Definitions)
to prevent double taxation or to further any other purpose of the Convention.
Thus,
for example, for United States tax purposes, distributions from
independent retirement accounts w
ould be considered
to be pensions or
similar remuneration to which paragraph (1) applies. On the other hand,
the
term pension does not include, for United States tax purposes. pay­
ments in respect or the cancellation or premature termination or employ­
ment contracts (e.g . "golden handshakes" or severance pay). Such pay­
ments are taxable under the provisions
of
Articles 15 {Independent Per­
son
al Services), 16 (Dependent
Personal S
ervices) or 17 (Artiste
s and
Athletes).
•
Paragraph (?.) provides that annuities paid "to an individual resident
of a Contracting State will be taxable only in that Contracting State. The
term "aMuities" is defined in par
agraph
(5) as a stated sum paid
peri­
odically
at stated times during life, or during
a specified number
or years,
under an obligation to make the payments in return for adequate and full
consideration (other than for services rendered).

Paragraph
(3) p·ovides that child support payments made by an
individual resident of or.e Contracting State to an individual resident of
the other Contracting State will be exempt from tax in that other Con­
tracting State. The term "child support payments" is defined in para­
graph
(6) as periodic payments for the support of a minor child made
pursuant to a written separation agreement or a decree of divorce,
separate maintenance, or compulsory support.
This Article is subject to the saving clause of paragraph (3) of
Article 6 (General Rules of TPxation). Therefore, individuals who are
citizens or residents of a Contracting State may be taxed by that Con;.
tracting State without regard to this Article,
Article 19.
SOCIAL SECURITY PAYMENTS
This Article provides that social security payments and other public
pensions, e, g. • railroad retirement benefits, paid by one Contracting
State to an individual who iS a resident of the other Contracting State
(or, in the case of such payments by the Philippines, to an individual
who is a citizen of the United States) will be taxable only in the first­
mentioned Contracting State. Payments described in Article 20 (Govern­
mental Functions) are not covered by this.Article.
Article 20, GOVERNMENTAL FUNCTIONS
Under this Article, wages, salaries, and similar remuneration,
including pensions, aMulties, or similar benefits, paid from public funds
of one
Contracting State to a citizen of that Contracting State, or to a
citizen
of a State other than a Contracting State who comes to the other
Contracting State expressly for the purpose of being employed by the
first-mentioned Contracting State, for labor or personal services per­
formed as an employee of the national government
of that Contracting
State, or any agency thereof, in the discharge of functions
of a govern­
mental nature will be exempt from tax by the other Contracting State.
If the individual becomes a citizen of, or acquires immigrant status in,
the
other Contracting State, that
other Contracting State may tax the
individual without regard to this Article.
See paragraphs (3) and (4)(b)
of
Article 6 (General Rules
of Taxation). Remuneration or pensions
paid in respect of services rendered in connection with any trade or
business carried on by one of the Contracting States or any agency
thereof
will be treated the same as compensation received from a private
employer, and the provisions
of Articles 15 (Independent Personal
Services),
16 (Dependent Personal Services) and 18 (Private Pensions and AMuities),
as the case may be, will apply,
This Article applies only to remuneration paid out of public funds
by the national government of a Contracting State or its agencies.

Article 21, TEACHERS
Paragraph
(1) provides that, U a resident of one Contracting State
is invited by the other Contracting State, a political subdivision or local
authority
thereof, or by a university or other recognized educational
institution in that other Contracting State to come to the other Contract­
ing
State for a period not expected to exceed 2 years tor the purpose or
teaching or engaging in research, or both,
at a university or other recog­
nized educational institution, and i! such resident comes to that other
Contracting
State primarily tor such purpose, his income from personal
services for teaching or research at such university or educational in­
stitution will be exempt from tax by that other Contracting State for a
period not exceeding 2 years from the date or his arrival in that other
Contracting State.
Since a temporary vi'sit may be or such a duration that an individual
may
lose his status as a resident or the Contracting State or which he
was a resident at the time he became eligible for the benefits or this
Article, the individual need only be a resident or such Contracting State
at the beginning o! his visit. However, 1! the individual becomes a citizen
of, or acquires immigrant status in, the other Contracting State, that
other Contracting State may tax the individual without regard to this
Article, See paragraphs (3) and (4)(b) or Article 6 (General Rules or
Taxation), U the individual's visit exceeds a period or 2 years from
the
date or his arrival, the exemption applies only to the income received
by the individual before the expiration or such 2-year period, H:)wever,
it the period or the visit had been expected to exceed two years then the
exemption does not apply to any or the income earned, H::>wever, il an
individual who otherwise meets the requirements of this Article expects
to visit
tor a period or two years tor the purpose o! teaching and
for a
subsequent period o!, !gr example, two years tor purposes described
in paragraph-{1) of Article 22 (Students and Trainees), then pursuant to
paragraph (4) of Article 22 the exemption provided by this Article does
apply,
.A person who visits a Contracting State tor the purposes explained
in this Article and meets the qualifications contained in it may again
claim its benefits il he first reestablishes his residence in the other
Contracting State, In such a case, the person claiming these benefits.
on a subsequent occasion must first satisfy the competent authority
of the first-mentioned Contracting
State that he had become a
bona fide
resident of the other Contracting
State !or a substantial period of time.
Pursuant
to paragraph (2
), this Article
does not apply to income
from
research undertaken not in the general
interest (i, e.
,
public interest)
but primarily for the private
benefit of a specific person
or persons other
than the person performing the research. For example,
research
projects
which are undertaken to discover or perfect product processes, designs,
etc,
,
which are expected to be
commercially
exploited by the researcher
or his present (or former) employer
do not
qualify under this Article,

Article 22,
STUDENTS AND TRAINEES
Paragraph
(1) provides that an individual who ls a resident of one
Contracting State at the time he becomes temporarily present ln the
other Contracting State and who ls tempcrarily present therein for the
primary purpose
of studying at a university or other recognized educa­
tional institution, securing training required to qualify him to practice
a
profession or professional specialty, or studying or doing research as
a
recipient of a grant, allowance, or award from a governmental, religious,
charitable, scientific, literary, or educational organization, will be exempt
from
tax by that other Contracting State, with respect to certain amounts,
for a period not exceeding 5 taxable years from the date of his arrival
in that other Contracting State, The amounts exempted under this provi­
sion are gifts
from abroad !or the purpose of his maintenance, education,
study,
research or training: the grant, allowance, or award; and, income
from personal services· performed in the other Contracting State not in
excess of $3,000 (or its equivalent in Philippine pesos) !or any taxable
year. For United States tax purposes, gifts will be considered to be from
abroad when they are borne by a person who ls not a resident
(dS defined
in Article 3 (Fiscal Domicile)) of the United States,
Under
paragraph (2), an individual who is a resident of one Contract­
ing State at the time he becomes temporarily present in the other Contract­
ing
State and who is temporarily present therein as an employee of, or
under contract with, a resident of the first-mentioned Contracting State,
for
the primary purpose of acquiring techn_ical, professional, or business
experience from a person other than that resident of the first-mentioned
Contrac
ting State or other than a person related to such resident, or
studying at a
university or other recognized educational institution in that
other Contracting State, will be exempt from tax by that other Contracting
State
f'or a period not exceeding 12 consecutive months, on income from
personal
services not in excess
of $7,500 or Us equivalent in Philippine
pesos for any taxable year,
Under
paragraph (3), an individual who is a resident
of one Contract­
ing
State at the time he becomes temporariliy present in the other Con­
tracting
State and who is temporarily present therein for a period not
exceeding
1 year, as a participant in a program sponsored by the govern­
ment
of the other Contracting State, for the primary purpose of training,
research, or study, will be exempt from tax by the other Contracting State
with respect to his income from personal services in respect of su
ch train­
ing, research, or study performed in that other Contracting State in an
aggregate amount not in excess of $10,000 or its equivalent in Philippine
pesos for any taxable year,
The monetary limits provided in paragraphs
(1 ), (2), or (31 are in
addition to, and not in lieu of, other exemptions provided by the Code,
Thus, an unmarried resident of the Philippines who is temporarily present
in the United States for the primary purpose of studying at a university

would be entitled to exclude $3,000 or income from the-performance

of
personal services (if he is present in the United States for periods

totaling less than 90 days during the taxable year) and, in addition.

would be entitled to the personal exemption allowed by section 151 of

the Code, as provided in section 873(b) or the Code.

• In comparison to paragraph (2)(c) or Article 15 Ondependent Personal
Services), which provides that the competent authorities may agree in an
exchange or letters to a monetary limitation in excess or $10,000 or its
equivalent in Philippine pesos, the monetary limitations of paragraphs
(
l
),
(2),
and (3) cannot
be increased
by means
of an exchange
of letters
betv,een the competent authorities.
The first sentence of paragraph (4) provides that the benefits pro­
vided in paragraph
(l) for certain students, trainees and researchers
and the benefits provided under Article 21 (Teachers), when taken to­
gether, may extend only for such period of time, not to exceed 5 taxable
years from the date or the individual's arrival, as may reasonably or
customarily be required to effectuate the purpose of the visit. The second
sentence of paragraph (4) makes it clear that the benefits provided by
Article 21 (Teachers) will not be available to an individual if, during the
immediately preceding period, the individual enjoyed the benefits provided
by paragraph
(l). Thus. a Philippine individual who originally entered the
United States for the purpose of becoming a student and received benefits
under paragraph
(l) must leave the United· States and reestablish residence
in the Philippines before he can obtain the benefits or Article 21. In such a
case, the person claiming the benefits of Article 21 on a subsequent occa­
sion must first satisfy the competent authority of the United States that
he had become a bona fide resident of the Philippines for a substantial
period or time. In addition, the individual must, of course, meet the re­
quirements of paragraph
(1) of Article 21, viz. , he must return at the
invitation of the United States, a political SUbaivision or local authority
thereof, or a university or other recognized educational institution for
the primary purpose of becoming a teacher, etc.
If an individual qualifies for the benefits of' more than one of the
provisions of this Article, such individual may choose the most favorable
provision but may not claim the benefits of more than one provision in
any taxable year as a means of avoiding the limitation provided. Thus,
for
example, an individual who comes to the other Contracting State for
the primary purpose of studying may be able to qualify under either para­
graph (2) or (3) of this Article. However, he cannot combine the maximum
exclusion limits in those two paragraphs to exclude $17,500 during the
taxable year. I!' the individual becomes a citizen of, or acquires immi­
grant status in, the other Contracting State, that other Contracting State
. may tax the individual without regard to this Article. See paragraphs (3)
and
(4)(b) of Article
6
(General Rules of Taxation).

Article 23.
RELIEF FROM DOUBLE TAXATION
In order to avoid double taxation, each Contracting Statt
g:
.
•es in

this Article to provide to Its citizens or residents a credit agair,., .'8

taxes for taxes paid by such persons to the other Contracting State.

The United States agrees to allow a United States citizen or resi­
dent
as a credit against United States tax the appropriate amount of taxes
pal'tl
or accrued to the Philippines in accordance with the provisions and
subject to the limitations or the law or the United States (as it may be
amended from time to time without changing the general principle of
paragraph (1 )). In addition, in the case of a United States corporation
owning at least 10 percent or the voting stock of a Philippine corporation
Crom
which it receives dividends in any taxable year, the United States
will allow credit for the appropriate amount or taxes paid or accrued to
the
Philippines by the Philippine corporation paying such dividends with
respect to the profits out of which such dividends are paid. The appro­
priate
amount will be based upon the amount or tax paid or accrued to the
Philippines
but the credit ls not to exceed the limitations (for the purpose
of limiting the credit to the United States tax on Income from sources
within the Philippines or on income from sources outside of the United
States) provided by United States law for the taxable year. This provision
does
not require the United States to provide a per-country or overall
limitation in the future so long as the general principle of a foreign tax
credit remains in effect. For the purpose
of applying the United States
credit
In relation to taxes paid or accrued to the Philippines, the rules
set forth in Article 4 (Source or Income) will be applied to determine
the source of income, and the taxes referred to In paragraphs (l )(b) and
(2) or Article 1 (Taxes Covered) will be considered to be income taxes.
P:ragraph (2) provides the general rule that the Philippines will
allow a Philippine citizen or resident as a credit against Philippine
tax the appropriate amount
of income taxes paid or accrued to the United
States and, in the case
of a Philippine corporation owning at least 50 per­
cent of the voting stock or a United States corporation from which it re
ceives dividends in any taxable year, will also allow credit for the
appropriate amount or taxes paid or accrued to the United States by the
United States corporation paying such dividends with respect to the profits
out of which such dividends are paid, The appropriate amount will be
based upon the amount of tax paid or accrued to the United States but will
not exceed the limitations (for the purpose of limiting the credit to the
Philippin
e tax on income from sources within the United States and on
income from sources outside the Philippines) provided by Philippine la
w
for the taxable year. Under section 30(c)(4) or the Philippine Code, the
Philippine foreign tax credit is subject to both the per-country and overall
limitations. Cf course, the Philippines are not obligated to retain such
limitations
as long as the principle of a foreign
tax credit is retained.
.
For the purpose of applying the Philippine credit in relation to taxes
paid or accrued to the United
States
,
the
rules set !orth in
Article 4
(Source or Income) will be applied to determine the source of income
and the taxes referred to In
paragraphs
(1 )(a) and (2) or Article 1 (Taxes
Covered)
will be considered to be income
taxes.
•

The general rule of paragraph (2). that citizens of the Philippines
will be given a credit against Philippine tax !or income taxes paid or
accrued to the United States. is subject to an exception contained in an
Exchange of Notes between the Governments
of the Philippines and the
United States dated November 24. 1976. In that Exchange o! Notes. it
was agreed that so long as the Philippine Government taxes the worldwide
income o! Philippine citizens residing outside the Philippines at reduced
rates o! 1. 2. or 3 percent. the Philippine Government may give a
deduction
rather than a credit to those
citizens !or U.S. taxes paid.
It was also agreed that in the event that those ·rates are increased.
Article 23 would require the Philippine Government to grant their
nonresident citizens a foreign tax credit !or U.S. taxes.
Article 24. NONDlSCRIMlNA TION
This l.rticle sets forth the general rules prohibiting discrimina
tory taxation of residents and corporations of one Contracting State
by
the other Contracting State. It also reserves to the Philippines
the
right to limit to its citizens or corporations certain tax incentives
in
carefully limited circumstances described in currently existing
Philippine law.
•
Paragraph (1) provides that a citizen o! one Contracting State who
is a resident o! the other Contracting State will not be subject in that
other Contracting State to more burdensome taxes than a citizen o! that
other Contracting State who is a resident thereof. The determination
of whether more burdensome taxation exists is to be made by comparing
the treatment o! individuals who are in comparable positions. Thus.
for
example. a citizen of the Philippines who is a resident of the United
States and who otherwise meets the requirements specified in section
911
of the Code would. under this Article. be eligible for the benefits
of section 911 even though not a citizen of the United States, On the
other
hand. just as a United States citizen who becomes a nonresident
alien
at any time during a taxable year or whose spouse is a nonresident
alien at any time during a taxable year cannot file a joint return !or that
year. a Philippine citizen would not be entitled to file a joint return
with
his spouse if either is a nonresident alien at any time during
the
taxable year and the election provided in section 6013(g) of the Code
has not been made.
Paragraph (2) provides that a permanent establishment which a
resident
of one Contracting State has in the other Contracting State will
not be subject in that other Contracting State to more burdensome taxes
than a resident of that other Contracting State carrying on the same
activities, However. this does not obligate a Contracting State to grant
to individual residents of the other Contracting State any personal allow
ances. reliefs. or deductions
•
!or taxation purposes on account of civil
status
or family responsibility which it grants its own individual residents.

Paragraph (3) prohibits one Contracting State from subjecting a
corporation of such Contracting State the capital of
which is wholly or
partly owned or controlled, directly or indirectly, by one or more resi­
dents
of the other Contracting State to any taxation or any requirement
connected with taxation which is other or more burdensome than those
applicable to corporations of the first-mentioned Contracting State carry­
ing on the same activities, the capital of which is wholly or partly
ow.ned or controlled by one or more residents of the first-mentioned
Contracting State.
Under
paragraph (4), the term "taxes" or "taxation" means, for
purposes of this Article, taxes or taxation of every kind imposed at the
national, state or local level, notwithstanding any other provision of
the Convention. However, for other purposes of the Convention, the
term "tax" means tax imposed by the United States or the Philippines
to which the Convention applies. See paragraph (l)(g) of Article 2
(General Definitions).
Paragraphs (5) and (6) are exceptions to the general rules set forth
in paragraphs (l), (2), and (3). Paragraph (5) provides that, with
respect to the income tax imposed under Title II of the Philippine Code,
nothmg
in paragraphs (l ), (?), and (3) will prevent the Philippines from
limiting to its citizens or corporations the enjoyment of tax incentives
granted under the following three provisions of Philippine law: section
6
of the Investment Incentives Act (Republic Act
No.
5186); sections 5
and 7(b) of the Export Incentives Act (Republic Act No. 6135): and section
9 of the Investment Incentives Program for the Tourism Industry (Presi­
dential
Decree No. 535). However, only the incentives which were in
force on and have not been modified since Ocrober 1, 1976, the date
of
signature of the Convention, or have been modified only in minor respects
so as not to affect their general character, may be limited to Philippine
citizens or corporations.
The
policy of the Investment Incentives Act, as expressed in section
2
thereof, is the acceleration of the sound development of the Philippine
economy in consonance with the principles and objectives
of economic
nationalism.
The Investment Incentives Act, the Export Incentives Act, and the
Investment Incentives Program !or the Tourism Industry represent a
broad Philippine program to develop specific areas of the Philippine
economy without relinquishing Philippine control thereover. Under that
program, certain Philippine corporations can register with the
Philippine
Board of Investments, and become registered enterprises. To register,
generally,
60 percent of a Philippine corporations • voting stock must be
owned and controlled by Philippine nationals. If a registered enterprise
is engaged in specified preferred economic areas of investment or be­
comes a pioneer enterprise, the corporation and its investors, both

foreign and Philippine, are entitled to specified economic or tax incen­
tives
which are not otherwise granted by Philippine internal law. A
pioneer enterprise is a registered enterprise that is engaged in
the
manufacture,
processing, or production of goods, products, or raw
materials that are not being produced in the Philippines on a commercial
scale or is a registered enterprise which uses a design, formula,
scheme, method, process, or system of production or transformation
which is new or untried in the Philippines and which involves the sub­
stantial use and processing of Philippine raw materials.
The incentives granted under the provisions referred to in para­
graph (5) are limited, with one exception which relates to certain Philip­
pine corporations, to Philippine nationals. A Philippine national is a
Philippine citizen, a partnership
or
association wholly owned by Philippine
citizens,
a Philippine corporation of which at least 60 percent of the
outstanding voting shares are ownedand held by Philippine citizens, or
trustees of certainpension _ tr.1ts benefitting Philippine nationals.
•
The following three incentives are granted by section 6 of the Invest­
ment Incentives Act to Philippine nationals who invest in pioneer enter­
prises. First, Philippine nationals are allowed a deduction from their
taxable income (which cannot exceed 10 percent of taxable income) for an
investment of cash or property made in the form of an acquisition of
shares in the original or increased capital stock of a pioneer
enterprise.
A
deduction is allowed only if the investment is made within 7 years from
the date of the corporation's registration and the shares are held for a
period of not less than 3 years, In addition, Philippine nationals are
granted an exemption from Philippine income tax for capital gains which
are
invested in new issues of capital stock of, or in the purchase of stock
owned by foreigners in, pioneer enterprises. However, the investment
must be made within 6 months from the date of realization of the gain
and the stock must not be disposed of for 3 years. Finally, gain realized
by Philippine nationals upon the disposition of stock dividends received
from pioneer enterprises are exempt from tax, provided such disposition
occurs within 7 years from the date of registration of the enterprise.
Section
5
of the Export Incentives Act grants the same three incentives
to Philippine nationals for investment in registered export producers
that are pioneer enterprises. Section 9 of the Investment Incentives
Program for the Tourism Industry grants only two of those incentives-­
the deduction for investment and the
capital gains exemption--to Philippine
nationals who invest in registe-red tourism enterprises.
Section 7(b) of the Export Incentives Act differs from the above des­
cri
bed tax incenti
ves in that it applies to the export producer rather than
the investor therein. Under that section, a registe.red export producer
which
is a
Philippine citizen or a Philippine corporation of which 60 per­
cent of its capital
is owned and controlled by
Philippine citizens is entitled
to a deduction from taxable income in an amount equivalent to the sum of
the direct labor cost and local raw materials used in the manufacture of
export products.
That deduction JHay only be claimed during the 5-year
period beginning on the date of its registration and cannot exceed 25 per­
cent of the registered export producer's taxable income.

Oher
tax incentives found in the above described acts or the presi­
dential decree or In other acts or decrees which result ln more burden­
some taxation for United States persons resident in the Philippines, or
Philippine corporations partly or wholly owned or controlled directly
or indirectly by United States residents are subject to the general rules
of paragraphs (1 ), (2), and (3), Thus, United States citizens will be
eli
gible for these incentives.
_
Paragraph
(6) provides that, with respect to taxes other than the
income tax imposed under Title D of the Philippine Code, nothing in the
first three paragraphs will prevent the Philippines or a Political sub.:
division or local authority thereof from limiting to Philippine citizens
or
corporations the enjoyment of tax incentives for the promotion of
industry
or business, similar to those discussed above in connection
with paragraph (5), However, only the incentives which were in force
on, and have not been modified since O:tober 1, 1976, the date of
signature of the Convention, or have bee., modified only in minor respects
so as not to affect their general character, may be limited to Phillipine
citizens or corporations.
A
final exception to the general rules of paragraphs (l}, (2), and
(3) relates to the taxation of income derived from the operation of ships
and aircraft in international traffic. See the discussion
of Article 9
(Shipping and Air Transport), supra.
Article 25,
MUTUAL AGREEMENT PROCEDURE
Under paragraph (1 ), when a resident or citizen of one Contracting
State considers that action of one or both Contracting States results or
will result for him in taxation not in accordance with the Convention,
he may, notwithstanding the remedies provided by the national laws of
the Contracting States, present his case to the competent authority
of the Contracting State of which he is a resident or citizen. A resident
or citizen of a Contracting State need not, although it is anticipated
that in the normal situation he will, exhaust his other administrative
or judicial remedies prior to resorting to the use of the mutual agreement
procedure, If the claim is considered to have merit by the competent
authority, that competent authority will endeavor to come to an agreement
with
the competent authority of the other Contracting State with a view
to the avoidance of taxation not in accordance with the Convention.
Paragraph (2) requires the competent authorities of the two Contract­
ing States to endeavor to resolve by mutual agreement any difficulties
or
doubts
arising as to the application of
the
Convention. In particular, the
competent
authorities may agree to the same attribution of business profits
to
a resident of one Contracting
State and its
permanent establishment
situated in the other Contracting State: the same !lllocation of income,
deductions,
credits, or allowances betw
een a resident of one Contracting
State
and a related person and to the
rea
djustment of taxes imposed by.
each
Contracting State to reflect such
al
location: the same determination
of
the source of particular items
of inco
me: and, the same characteri­
zation o{ particular items o{ income.

Under paragraph (3 ), in implementing the provisions of this Article,
the competent authorities may communicate with each other directly and;
when advisable, meet together for an oral exchange or opinions.
Under paragraph (4 ), in cases in which the competent authorities
reach an agreement, taxes will be imposed on such income and refund or
credit or taxes will be allowed by the Contracting States in accordance
with such agreement. In the case or the United States, where an agree­
m nt is reached between the competent authorities which requires the
United States to make a refund of tax or to extend any other similar
credit, such refund or credit will be allowed, notwithstanding procedural
barriers otherwise existing under United States law, such as the statute
of limitations, In cases where an agreement caMot be reached between
the two competent authorities, the United States will not be required
to provide any relief for double taxation on a unilateral basis, Paragraph
(4) , or course, does not authorize the imposition of additional taxes
after the statute of limitations has run.
In the case of the Philippines, a refund or ere-.: .. will also be
allowed, but such refund or credit v.'ill be subject to Philippine proce­
dural rules (including the statute or limitations). This permits the Philip­
pines to disallow a claim for refund or credit on the basis or section
309 or the Philippine Code, if that claim is tiled later than 2 years from
the payment or the tax. However, .the Philippines will issue a tax credit
certificate, notwithstanding any Philippine procedural rule, such as
section 309 or the Philippine Code, U' a claim is filed with the competent
authority
or the Philippines no later than 2 years from the close of the
Philippine taxable year in which the United States tax imposed under
paragraph
(4) is paid, The amount of the tax credit certificate
will
be computed in the same manner as if an actual re!und had been made.
It may be used only as a credit ag.;inst Philippine tax liability and
will not give rise to a refund.
When
the Philippine tax credit certificate is used by a taxpayer
to
offset its Philippine tax liability, there is an adjustment in Philippine
taxes for U.S. tax credit purposes: the Philippine taxes paid by that
taxpayer !or the year (or years) with respect to which the certificate
was issued are reduced to the extent that the credit authorized in the
certificate is used to offset its Philippine taxes in another year (or
years). Consequently, !or U.S. tax credit purposes, there is no
reduction in the taxpayer's Philippine taxes for the year (or years)
with
respect to which the certificate is used as a credit against its
Philippine taxes,
Because
books or accounts· and
other accounting
records must
be
preserved, under section 337 or the Philippine Code, for a period or at
least
5 years from the date of the last
entry in
each book, it is anticipated
that
the compete-nt authority or the Philippines will have at
his disposal

sufficient information to come to an agreement with the competent authority
of the United States so that taxation not in accordance with the provisions
of
the Convention will be avoided. Thus, if a claim for a tax credit
certificate is filed vdthin 5 taxable years from the close of the Philippine
tax.able years in issue, the competent authorities
of both Contracting
States
will communicate or meet and, if agreement is reached, the tax
credit certificate will be issued. However, if a claim is filed after the
aforementioned S•taxable year period, the competent authority of the
Philippines may not have sufficient information at his disposal to come
to an agreement with the competent authority of the United States if the
Philippine taxpayer did not preserve its books of accounts or other
accounting records for longer than the 5-year minimum period. To
facilitate the agreement process between the competent authorities of
the two Contracting States, paragraph (4) provides that a tax credit
certificate will be issued with respect to a claim filed after the 5-taxable
year period beginning with the close of the Philippine taxable year in
issue only if the claim is supported by the books and records c: the tax­
payer.
Article 26.
EXCHANGE OF INFORM.A TION
Paragraph
(1) provides for a system of administrative cooperation
between the competent authorities of the two Contracting States by requir
ing an exchange of information necessary for the carrying out of the
Convention and of the domestic laws of the Contracting States concerning
taxes covered by the Convention insofar as the taxation thereunder is in
accordance with the Convention. The competent authorities may exchange
information in connection with tax compliance generally, not merely
illegal acts or crimes. Information need be exchanged, however, only
if it is of a class that can be obtained .under the laws and administrative
practices
of each Contracting State with respect to its own taxes.
•
Paragraph (2) provides that information exchanged must be treated
as
secret. However, such information may be disclosed to any persons
or authorities concerned with or made part of the public record with
respect to the assessment, collection, or enforcement of, or litigation
with
respect to, the taxes which are the subject of the Convention. Thus,
disclosure is not prohibited as a part of a public proceeding before a
court or an administrative body.
Paragraph (3) provides that no information ,nay be exchanged which
would be contrary to public policy.
Paragraph (4) provides that if information is requested by a Contract­
ing State in accordance with Article 26, the other Contracting State will
obtain the information to which the request relates from or with respect
to its residents or with respect
to its residents or corporations in the
same
manner and to the same extent as if the tax
of the requesting State
were
the tax
of the other State and
were being imposed by the other State.

A Contracting State may obtain information from or with respect to its
residents or corporations in accordance with paragraph (4) for the sole
purpose
of assisting the other Contracting State in the determination of
the taxes of that other State, Thus, a: Contracting State may use the
mechanisms provided by its. internal law to obtain information for the
other
Contracting State even if it has no internal tax interest in obtaining
that information; its only interest being the request made under paragraph
(
4}.
Paragraph (5) provides that depositions of witnesses and copies of
unedited original documents (including books, papers, statements, records,
accounts, or writings) may be provided by
the competent authority of a
Contracting
State if specifically requested by the competent authority of
the other Contracting State to the extent such depositions and documents
can be obtained under the laws and administrative practices of e_ach Con­
tracting State with respect to its own taxes,
Paragraph
(6) provides that the exchange of information may be on
either a routine basis or on request with reference to particular cases,
and
that the competent authorities may agree on the list of information
to be furnished on a routine basis,
Article 27,
ASSISTANCE IN COLLECTION
Paragraph
(1) provides that one Contracting State will give the other
Contracting State limited assistan
ce in
collecting its taxes, Thus, each
Contracting
State is required to collect on behalf of the
other Contract•
ing State only those taxes imposed
by
such other Contracting State as
will ensure that any exemption or reduced rate of tax granted under this
Convention by such other Contracting State is not enjoyed by persons
not entitled to such benefits,
Paragraph
(2) makes clear that a Contracting State is not obligated
to
carry out measures at variance
with
the laws or the administrative
practice
of either Contracting State with respect to the collection of its
own taxes,
Article 28,
DIPLOMATIC
AND CONSULAR OFFICERS
This
Article provides that nothing in the Convention will affect the
fiscal
privileges of diplomatic and consula
r officials under the
general
rules of international law or under
the
provisions
of special
agreements,
This
is merely a special case
of the
general rule provided in
paragraph
(2) of Article 6 (General Rules of Taxation)
.

Article 29.
ENTRY r:.:TO FORCE
Paragraph
(1) provicies that the Convention is subject to ratification
and provides for the exchange of instruments of ratification. The Con­
vention
will enter into force 30 days after the date of exchange of such
instruments of ratification. The Convention shall first have effect as
respects
the rate of withholding of tax, to amounts paid on or after
January 1 of the year following the date on which the Convention enters
into
force and, as respects other taxes, to taxable years beginning on
or after January 1 of the year following the date on which the Conven­
tion enters into force. However, paragraph (2) provides an exception·
to those effective dates. Under paragraph (2)(b)(iii) of Article 13
(Royalties),
the tax imposed by the Philippines on royalties derived
by residents of the United States is limited to an amount that doe.s not
exceed
the lowest rate of Philippine tax that may be imposed on royalties
of
the same kind paid under similar circumstances to a resident of
a
third State. That provision will not have effect before January 1,
1979, with respect to payments received as consideration for the
use of, or the right to use, a copyright of cinematographic films or
films or tapes used for radio or television broadcasting.
Article 30. TERMINATION
Article 30 provides that the Convention will continue in force inde­
finitely, but that it may be terminated by either Contracting State at any
time after 5 years from the date it enters into force. A Contracting
State seeking to terminate the Convention must give at least 6 months'
prior notice through diplomatic channels. If the Convention is termi­
nated, such termination will be effective with respect to income
of
calendar years or taxable years begiMing (or, in the cases of taxes
payable at source, payments made) on or after January 1 next following
the expiration of the 6-month period. It is intended that the reference
to calendar years applies only to cases where the taxable year is the
calendar year.